6 min read
Jun 21, 2023
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Lenders, landlords and credit card issuers use credit scores to determine the risk of a borrower defaulting on their debt. If the score is high, it shows the person has a reliable stream of income and can be trusted to repay their debt on time. If the score is low, there is a risk the person may be unable to pay their bills. Credit scores determine the likelihood of the person falling behind on their bills for more than 90 days within the next 24 months.
If you are applying for a loan or credit card, your credit score will determine your interest rate. Having a high score can help you lock in a lower interest rate, which will make it less expensive to buy a house, car or borrow money in the future.
FICO and Vantage scores are two different types of credit scores. These scores may be used to tally your final score based on your financial history. Lenders have long used the FICO score to evaluate loan applicants, but the Vantage score has been growing in popularity over the last few years. These scores are generally used in the same way, but they are calculated using different percentages and equations.
Lesson Notes:
- FICO and Vantage scores are two types of credit scores that rate your ability to repay your debt on time.
- Lenders and landlords use these scores to determine whether you can make regular monthly payments.
- These scores are calculated using different percentages, but they rely on the same factors, including your payment history, credit utilization and length of your history.
LESSON CONTENTS
What is a FICO score?
FICO scores have dominated the financial industry for over 100 years. The company known as Fair Isaac Corp. first introduced the idea in 1989, and it remains a reliable indicator of a person’s credit trustworthiness to this day. Many people often use the term “FICO score” and “credit score” interchangeably, but FICO scores are just one type of credit score.
These scores range from 300 to 850. The higher the score, the more likely the person will repay their debts on time. The company also issues industry-specific scores for auto and credit card lenders. These scores range from 250 to 900.
How are FICO scores calculated?
Your FICO credit score is based on the information found in your credit reports, including those issued by the three main credit reporting companies: Equifax, Experian and TransUnion. These agencies may possess different information, so your score may depend on which agency the company pulled your information from.
Your credit information is separated into individual categories, including amounts owed or credit utilization, payment history, length of credit history, credit mix and new credit. Each category is weighted based on its overall influence on your ability to repay your debts on time.
- Payment history accounts for 35%.
- Amounts owed, or credit utilization, account for 30% of your score.
- Length of credit history accounts for 15%
- Credit mix represents 10%.
- New credit accounts for 10%.
As you can see, your payment history will influence your FICO score the most, and this rates your ability to pay your bills on time. Consider setting up automatic payments for your monthly bills to avoid falling behind.
Your total amounts owed will also influence your score. If you have a credit card or line of credit, experts say it’s best to avoid utilizing more than 30% of the credit to maintain a good credit score.
The length of your credit history, amount of new credit you take on and the number of accounts with unpaid balances will play a small role in determining your score. Focus on paying your bills on time and don’t utilize any more credit than necessary. Avoid taking on more debt to keep your amounts owed to a minimum.
What is a Vantage score?
The Vantage score was first introduced in 2006. It is a joint venture between the three main credit reporting companies: Experian, TransUnion and Equifax. These agencies use an algorithm to calculate the final score based on information from the person’s credit reports. The Vantage system gets an update every few years. Vantage 4.0 is being unveiled but is not yet widely available.
Just like the FICO score, the Vantage score is used to determine the person’s ability to repay their debts on time. More lenders and landlords are relying on the Vantage score instead of, or in addition to, the FICO score. These scores also range from 300 to 850.
How are Vantage scores calculated?
Vantage scores are calculated using roughly the same factors as those used to calculate FICO scores, but each method weighs these categories differently.
The Vantage 3.0 method uses the following percentages:
- Payment history: 40%
- Age and type of credit: 21%
- Percent of credit used: 20%
- Total balances/debt: 11%
- Recent credit behavior and inquiries: 5%
- Available credit: 3%
Meanwhile, the Vantage 4.0 method uses the following percentages:
- Payment history: 41%
- Age/mix of credit: 20%
- Utilization: 20%
- New Credit: 11%
- Balance: 6%
- Available credit: 2%
As you can see, the Vantage score method applies more weight to your payment history, age and type of credits and less weight to your amounts owed than the FICO model.
The credit bureaus released the 4.0 version to better reflect a person’s ability to repay their debts on time. If you are checking your Vantage score, your number may depend on which method the company used to generate your report.
The differences between a Vantage score vs FICO score
There aren’t a lot of differences between a Vantage score and FICO score. Lenders and landlords use both types of scores to determine your ability to pay your bills on time.
However, these methods use different percentages to calculate your score. Your FICO score may be different than your Vantage score, depending on your financial history.
If you recently fell behind on your bills or missed a monthly payment, your Vantage score may be affected more adversely than your FICO score based on the latest percentages.
If you are applying for a loan or checking on your credit score, take a moment to look at both your FICO and Vantage score to see how they compare. You are entitled to a free copy of your credit report once a year. You can request a copy of your records online or by visiting a local financial institution.
What is a good credit score?
Most of us have to borrow money to buy a house, car or start a business. Having a good credit score can help you save thousands of dollars in interest every year.
Wondering what is a good credit score? Experts agree that good scores tend to be between 690 and 719. However, FICO defines a good credit score as 670-739.
If your score falls within this range, you should be able to lock in a low interest rate when applying for a loan or credit card.
How to improve your credit score
If you want to build credit, keep in mind that payment history is the single most important factor when determining your credit score. That’s why it’s important to pay your bills on time every month, including your student loans, credit card repayments, rent or mortgage and car loan.
If you are having trouble keeping up with all your bills, try lowering your monthly expenses as much as possible. Consider extending the terms of your home mortgage or car loan to lower your monthly payment. However, extending the terms means paying more in interest over the life of the loan. You can always pay more than the required amount every month if you make more money in the future.
Consider signing up for an income-driven repayment plan if you have student loans to avoid paying the full amount every month. Again, this can lead to more interest down the line, but it’s usually better than falling behind on your bills, so your credit score remains intact. If you’re not sure where to begin, connect with a financial coach and explore steps you can take to improve your credit.
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